Changing course

Sprott inc. of Toronto, a fund-management firm that has struggled over the past five years to regain its former glory as an investment powerhouse, is undergoing a dramatic reversal in direction.

The firm is retreating to a narrow focus on resources-related investments and hard assets. Sprott’s priority is to be an international investment leader in precious metals, energy and real assets such as farmland and infrastructure, and to capitalize on Sprott’s original brand recognition to attract a global clientele. A key part of this change involves selling part of the firm’s fund-management operations to Sprott executives in a deal that’s expected to close later this year.

The turnabout comes after Sprott spent several years adding other investment mandates to its cyclical resources-oriented lineup – a strategy of growing through diversification followed by many of Canada’s successful investment fund giants. The traditional view is that an assortment of portfolio managers, strategies and asset classes drives growth and helps investment-management firms weather inevitable ups and downs in financial markets.

According to Sprott CEO Peter Grosskopf, speaking at the firm’s recent annual meeting in Toronto, this new vision for Sprott is more “narrowly constituted,” and involves a leaner operation with lower expenses. Sprott’s goal in these redefined investment areas is to “offer best-in-class strategies and products, and to co-invest with clients to compound their capital and ours.”

Sprott is selling assets under management (AUM) of about $3 billion, including 48 fund products, for $46 million to a group led by John Wilson, CEO and co-chief investment officer of key subsidiary Sprott Asset Management LP (SAM), and SAM president James Fox. The AUM package includes diversified, actively managed mutual funds specializing in equities, fixed-income and precious metals, as well as hedge funds and some private accounts. The deal is subject to regulatory approval, and will result in a new name and image for the hived-off entity.

Grosskopf told Investment Executive in a 2013 interview that Sprott “can’t afford to sit idle while the resources business recovers” and was augmenting its product line. Now, he explains, Sprott’s move to shed AUM is a return to its roots and the company has been spreading its management, sales and financial resources across too many products and investment mandates.

“Our former strategy was to build two equally vibrant sides of the firm, but the challenges overcame us,” he said at the annual meeting. “Markets were a lot tougher, we faced headwinds on distribution and it was difficult to add value on one side, let alone on the different sides we were going after.”

Grosskopf anticipates the more focused firm will be better at attracting large global institutional investors. Sprott also is looking to form distribution relationships with international partners.

He says non-correlated investments, such as precious metals and other hard assets in which Sprott specializes, are an important form of portfolio insurance against a market downturn – and, he adds, the need has never been greater after six years of “almost unbelievable investment returns” in broad stock markets.

“We are in the early stages of allocation to investments in precious metals, agriculture and farmland, and [investor] interest is rising,” he says. “Infrastructure is a little further along.”

Sprott Inc. will be left with about $7.5 billion in AUM after the sale of the AUM package. Included is $865 million in 10 actively managed equity funds specializing in gold, silver and resources-related investments that are being bought by the newly hatched firm but will be subadvised by the original Sprott.

Sprott will continue to offer some passive products, such as closed-end physical bullion funds and securities-focused ETFs in the precious metals arena. The firm also will focus on finding attractive opportunities for its $750-million institutionally focused Private Resource Lending Corp.

Other remaining prongs of Sprott’s business include a resources-focused merchant bank and Sprott’s U.S. division. Sprott’s workforce is expected to be cut in half to about 100 employees. The employees being let go, including portfolio managers, client relations and back-office staff, will move to the new firm.

“Being all things to all people is tough,” says Chris Davis, director of manager research, at Toronto-based Morningstar Canada. “The new Sprott may be able to fare well in its niche, but it also will be subject to the vagaries of the commodities markets. And it’s challenging to build a stable business in an area that’s so volatile.”

The new company headed by Wilson and Fox faces a challenge in creating its own brand identity and attracting AUM in a competitive marketplace, says Scott Chan, financial services analyst at Canaccord Genuity Group Inc. in Toronto, adding: “Sprott’s funds have historically charged relatively high fees, and they now face massive headwinds on the retail side, where initiatives such as the second phase of the client relationship model are shining the spotlight on fees and fund performance.”

Although Sprott’s mutual fund family has been suffering net redemptions recently, the new operation run by Wilson and Fox will build on the success Sprott has had with specialized equities-based and debt products, including alternative strategies, absolute return, and energy and real estate offerings.

The $3-billion lineup, which Wilson says is big enough to stand on its own, includes several funds under the Enhanced banner introduced by Wilson after he came on board at SAM in 2012 from Cumberland Private Wealth Management Inc. of Toronto. The six Enhanced funds employ defensive strategies such as the use of put and call options or long/short hedging to boost returns and provide protection in falling markets.

Wilson says the new firm will not be a “broad supermarket,” but will move quickly to add more products in specialized areas.

He adds that after several years of bullish markets, there has been some media promotion of the message that “active management is dead and that investors need only ETFs and a robo- advisor.” Wilson disagrees, and says when markets stumble, the role of advisors and alternative strategies will be important in adding value to client portfolios.

“It’s in difficult markets where the hay is made,” he says. “We run highly differentiated strategies and are not benchmark-oriented. We help investors diversify against a variety of future outcomes. “

As another sign of the evolution of Sprott Inc., company founder Eric Sprott stepped down as chairman at the company’s annual meeting on May 10. He will remain as chairman emeritus as well as a significant shareholder and investor in Sprott products.

“I have my freedom now,” Eric Sprott told IE in an interview at the annual meeting. “I’m an investor – that’s what I like doing – and now I’m unshackled. I can make investments on my own, with no official function at Sprott.”